Department of Labor

Hearing on Fiduciary Definition Proposal

Testimony of 
Paul Schott Stevens
President and CEO
Investment Company Institute

March 1, 2011

I am Paul Stevens, president and CEO of the Investment Company Institute. I thank the Department of Labor for holding this hearing to consider its proposal to revise the definition of investment advisory activities that trigger fiduciary status under ERISA.

Fiduciary status entails one of the highest obligations, and also liabilities, known to the law. Fiduciary status underpins the entire ERISA compliance structure. Thus, rules governing who is a fiduciary need to provide clarity. They should not impede commonplace financial interactions. They must allow plans and retirement savers to obtain investments that meet their needs and gather a range of market input into their decision making process.

The Department’s current rule is 35 years old. We agree that the Department should review its rule in light of changes in how Americans save for retirement. But what has not changed in 35 years is the need to make very clear the line between commonplace financial market interactions and true advisory relationships. The rule adopted in 1975 did not “narrow” the definition of investment advice, as some now suggest, but rather implemented Congress’ intent that ERISA not disrupt established business practices of financial institutions interacting with employee benefit plans.

Revisions to the rule should embrace the following principles:

  • Persons who deal with plans or IRA investors must know whether or not they are fiduciaries.
  • Fiduciary status should attach only to genuine advisory relationships where a position of trust and confidence exists.
  • Simply selling an investment product cannot be a fiduciary act. And,
  • The rule should not discourage the assistance that recordkeepers engaged to administer plan accounts provide to help fiduciaries prudently select and monitor plan menu investments.

To this end, the Department should revise its proposal as follows:

First, the rule should create fiduciary duties only when the adviser provides advice or recommendations individualized to the plan or participant. Unfortunately, the proposal does not require that an investment recommendation be specific to the plan or its participants. General statements about an investment or class of investments, indeed all manner of ordinary business interactions, could be swept in. Many firms send out market newsletters, for example, that might suggest where interest rates or the price of gold are headed. When someone calls an IRA provider about a rollover, a call center representative might advise that X fund is designed to meet a particular investment objective, or that Y fund is a target date fund designed for people who expect to retire around a particular date, while providing no investment advice as such. No reasonable person would believe these sorts of interactions create or should create an advisory relationship of trust and confidence.

Second, the rule should not deem an entity to be a fiduciary based on a person’s “status” such as whether the entity or its affiliate is an investment adviser as defined in the Investment Advisers Act of 1940, if meeting that definition is unrelated to how the entity and the plan sponsor or participant interact. Determining whether someone gives advice under ERISA requires looking at the interaction itself and not whether that person or an affiliate is an adviser under the Advisers Act. The Department and the courts consistently and properly have viewed ERISA fiduciary status as a functional test—based on what you do.

To be sure, advisers do owe a fiduciary duty under the securities laws, but this extends only to their clients—i.e., to those institutions or individuals with whom the adviser has a mutual agreement to provide investment advisory services for compensation. It does not apply to every person with whom the adviser, or its affiliates, or any of its employees interacts. If Congress had wanted every firm that meets the Advisers Act definition to be an ERISA fiduciary, it could and would have said so. It did not.

Moreover, the Department should clarify that fiduciary status requires a mutual agreement that the person will be providing individualized advice that the recipient will consider in making investment decisions. This should be objectively determined so parties dealing with plan and IRA customers in good faith are not forever in doubt about their obligations and liabilities.

Third, our letter suggests several ways to improve the exceptions in the proposal. The exceptions are essential to making the rule work. We strongly urge the Department to retain the exceptions for participant investment education and information related to platform investments so as not to discourage the assistance and education that recordkeepers provide to plan fiduciaries making decisions on plan menu investments and to participants deciding how to allocate their accounts. As our letter points out, these exceptions also should be available for IRAs.

The Department also should retain—and clarify—the exception for selling an investment product. As proposed, transactions that might entail advice are exempt if it can be demonstrated the recipient knows, or should know, the person is providing any advice in its capacity as a seller or an agent of a seller, whose interests are adverse to the interests of the plan or its participants, and that the person is not undertaking to provide impartial investment advice.

The Department should make clear:

  • The exception is available to a broad range of sellers and agents. For example it should be available when a mutual fund is sold directly by the fund company or its affiliated distributor and when a fund is sold through a broker-dealer.
  • The exception should not require that a seller characterize itself as “adverse.” The sale of a mutual fund is not a zero-sum game where one side benefits only at the expense of the other side.

Fourth, the Department should carefully consider how the rule relates to rollovers and IRAs. In our view, the Department should maintain its position that the recommendation to take an otherwise permissible distribution is not investment advice. Otherwise, it will chill the routine process in which a worker leaves a job, contacts a financial services firm for help rolling over a 401(k) balance, and the firm explains the investments it offers and the benefits of a rollover. This simply is not investment advice with respect to the old 401(k) plan, even if the result is a liquidation of the prior employer’s 401(k) account.

In addition, the Department should complete and publish an analysis of the costs of the proposal on IRA investors and providers. While the proposal’s language reaches non-employer based IRAs, the Department’s economic analysis, which derives from Form 5500 data, does not consider the costs of the proposal on IRA investors and providers. The proposal will generate costs for IRA savers in that the prohibited transaction rules prohibit commission compensation to fiduciaries in many instances. If financial advisers must move from a commission structure to a wrap fee in the IRA market to comply with the prohibited transaction rules, this may, in many cases, result in higher fees to IRA investors, especially given the long-term nature of IRA investments. In addition, there are costs to IRA savers if financial advisers must curtail the information and services they offer to avoid crossing into fiduciary status.

Finally, we strongly urge the Department to look at the entire proposal in light of the comments it received, draft appropriate revisions, and issue a reproposal. This would be in keeping with President Obama’s recent direction to make sure interested parties are given a full and fair opportunity to comment on significant regulatory proposals. And it is in the best interests of Americans saving for retirement that the final rule is clear and workable and that it, like its predecessor, lasts for another 35 years.

Thank you, and I would be happy to take your questions.